The Wildcat Oil Company is trying to decide whether to lease or buy a new computer assisted drilling system for its oil exploration business. Management has decided that it must use the system to stay competitive; it will provide $600,000 in annual pretax cost savings. The system costs $5.5 million and will be depreciated straight-line to zero over five years. Wildcat’s tax rate is 34 percent, and the firm can borrow at 9 percent. Lambert Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $1,240,000 per year. Lambert’s policy is to require its lessees to make payments at the start of the year.

Many lessors require a security deposit in the form of a cash payment or other pledged collateral. Suppose Lambert requires Wildcat to pay a $200,000 security deposit at the inception of the lease. If the lease payment is still $1,240,000, is it advantageous for Wildcat to lease the equipment now?